Homes in many American cities are overvalued and overpriced

What's Happening

* According to one study, homes are overpriced throughout the nation. John Burns Real Estate Consulting found that the normal ratio of household income to home value is off by as much as 30% in 10 markets — meaning homes are overpriced by as much as a third in many parts of California, in Washington, DC, and in the Pacific Northwest, among other places (RealEstateConsulting.com 6.07).
* The conclusion? Home prices are due for a slide — and could have a violent crash if mortgage prices spike or a recession hits.
* The consultancy found that another 31 markets were notably inflated and due for a "correction" as well.

WHAT THIS MEANS TO BUSINESS

* With the subprime mortgage mess unfolding in 2007, the housing market has a way to go before settling back to historic norms. In the meantime, expect to see consumers tightening their belts, especially around discretionary spending. Also watch for more dramatic swings between scrimping and splurging.
* Many American consumers have considered their homes an asset that is tantamount to a savings account. But they may be realizing now that the value locked up in the house — and extended to credit lines — is less than they thought.
* Are we on the verge of a housing crisis? We're seeing signs that consumers feel some pain as credit tightens and dries up.

Source: Iconoculture, 8/23/07